Sunday, March 16, 2014

Why is Copper Falling?

Why is Copper Falling?

It’s the Economy, Stupid.

I wrote an article towards the last quarter of
2011 called “Copper has a Phd. in Economics”, where I stated that one of the
best indicators of the global economic cycle is Copper due to the immediate
effect on its price when demand in general slows, as it is used intensively in
Manufacturing, Industrial activity and Construction, to name a few very important areas
of the economy, key to its sustainability.

As it turns out, here we are three years later
and the results continue to validate the theory. Lately Copper has been falling
more precipitously due to the bad numbers coming out of China, which will
likely grow below 7% dragging world consumption and GDP.

I mentioned last week, the growth of the
emerging markets economy since 2009 was one of the key pieces of the world moving
forward (aside of the absurd amount of debt incurred by the developed world,
which eventually will get paid in some shape or form). Domestic credit
creation, a boom in industrial production and large amount of reserves kept the
emerging economies pulling the train, but they are running of out of steam due
to the natural law of diminishing returns.

Let’s take a look at the high correlation
between China’s growth and Copper through the two following graphs:

It is
possible to see that the fall on Copper prices is not a recent phenomena.

And neither is the decline on growth of the
Chinese economy.

The spillover of China’s lower growth will
first be felt in Emerging Markets (as it is already the case), although it is
inevitable in this globalized world to assume that eventually the Developed World
will feel the heat. Not even another round of QEternity in the US, or some form
of QE in Europe (let’s calling plainly money printing) or a second (third?)
round of Abenomics in Japan will suffice to save the day.

I have already demonstrated in recent comments
that the increase in debt and money printing have reached levels of marginal
contribution. Let’s just say it: the slowdown is now global. And money printing
and credit creation will increase, which in turn will probably save us from
falling off the cliff short term and postponing the pain. But debt has by
design the ability to destroy those who
never get to amortize it, it’s like a snowball that builds over interest growing
exponentially (interest over interest).

Can china make a soft landing? My answer is
that it’s very difficult from a physics point of view to make a soft landing on
a Jumbo 747 fully loaded.